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TRADING SYSTEMS


Electronic Arts An Attractive Buy Setup

11/07/11 09:24:01 AM
by Donald W. Pendergast, Jr.

Sometimes, a number of bullish factors converge in one place at the same time. This may be one of those times in shares of Electronic Arts.

Security:   ERTS
Position:   Buy

Electronic Arts (ERTS) shares had a nice run higher during October and, despite a modest pullback, appear to have broken out decisively to the upside once again. Here's a closer look at the exceedingly bullish daily chart of this NASDAQ issue (Figure 1).

FIGURE 1: ERTS, DAILY. When you get so many bullish technicals on one chart, it might be a good idea to pay special attention to any and all new trade entry triggers. Currently, a new Rahul Mohindar oscillator (RMO) swing buy signal has just fired here on the ERTS daily chart.
Graphic provided by: MetaStock.
Graphic provided by: RMO indicators and tools from MetaStock 11.
 
Lots of times, when evaluating the technical situation on a given chart, you might expect to see three or four meaningful technical and/or fundamental dynamics that all agree that the line of least resistance is toward higher prices. However, in the case of this daily chart of ERTS, we find at least six significant bullish technical factors at work:

1. A solid uptrend in force
2. Superior 13-week comparative relative strength versus the .SPX
3. Very strong long-term money flow based on the 100-period Chaikin money flow histogram (CMF)(100).
4. A new 52-week high
5. A new RMO swing buy signal
6. A wide-range breakout bar

Overall, this looks like a very attractive, fairly low-risk long entry setup in ERTS, one that might be best traded with a risk tolerance of no more than 1% to 2% of total account equity. Since most RMO traders enter on a buy stop just above the trigger bar high (vice versa for short RMO trade setups), this would equal a hypothetical entry price of about $26.14. Running a two-bar trailing stop of the daily lows as both the initial and trade management stop would mean a stop-loss of about $22.74 or a per-share risk of $3.60.

If you have a $25,000 cash equities account and want to limit risk to 1% ($250), then you simply take $250 and divide it by $3.60 to determine the number of shares to trade.

The amount works out to 69.4444 shares, but for the sake of a better fill, just round it up to 70 and you're still going to be in the ballpark. Once the trade is on and your initial stop is set, just keep adjusting that two-bar trail until the trade finally stops out for a win or a loss. It's a simple and stress-free way to manage a swing-style trade that works well in the real world. Try it out on your next swing trade, no matter what kind of entry trigger you rely on.




Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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